by Julia Groß, €uro on Sunday
EEurope is considered to be in acute danger of recession due to its dependence on Russian raw materials and the European Central Bank’s limited ability to act. Why Francis Ellison, Client Portfolio Manager eEuropean stocks at Columbia Threadneedle, but still believes there is money to be made in European stocks.
€uro on Sunday: At regular intervals, asset managers are proclaiming a comeback in European equities. Are we further away from that now than ever?
Francis Ellison: We are all paid to be optimists. Actually, that optimism is a good thing, too, because stock markets rise over the long term because they follow profits. And as long as companies find ways to increase their profits, the market will rise over the long term. But the last six months have been incredibly painful. However, our main thesis as a bottom-up manager of growth quality stocks in Europe is that there is still money to be made in European stocks despite the very difficult times. Even if that sounds arrogant: I don’t care if there are many bad companies in Europe as long as we find the good ones.
Are you currently looking forward to the opportunity to collect shares cheaply, or is the motto more “close your eyes and persevere”?
The problem is that we assume a fully invested portfolio. So we have to find both things to sell and things to buy. That is sometimes a challenge. The answer is that sometimes you don’t do anything because you don’t necessarily see the opportunity as big. The current changes have to do with interest rates and the price of oil. These are factors that dominate in the short term and we will get through that. At some point the market will switch and then investors will say again: I want to buy to hold shares in companies with high-quality business models. This will then also have a positive effect on such a portfolio.
And how does inflation affect your decisions and investments?
Direct inflation is a real help for us. Because when we buy companies, a large part of our risk analysis relates to pricing power. If costs increase by 10 percent, these firms can increase their prices by at least that much. So inflation is good because those companies’ competitors probably can’t do it. Indirectly, inflation is a major threat. Inflation leads to high interest rates. And when interest rates are all out of whack, you probably don’t want to own bonds, stocks, or anything else.
Do you expect it to come to this?
We don’t think that’s the case. But we think what we’ve seen over the past six months has been a major, one-off correction. Interest rates are no longer ridiculously low, just low. That gives me hope. Because the longer-term assets in which we invest have corrected and will continue to do so. But this correction will come to an end and we will return to the thesis that the stock price reflects long-term earnings development. So if you buy companies that are profitable over the long term, they should outperform the market.
You are heavily invested in the luxury segment. What makes you so sure that companies like Kering or LVMH can handle inflation?
The ultimate definition of a strong luxury branded product is that the actual cost of the product bears no relation to what the consumer is paying for it. If the price of a Swiss watch increases by 10 percent from one day to the next, more people are likely to want to buy it because it gives a sense of wealth and importance to be able to afford the watch. That’s why we like luxury and weighted heavily in the Threadneedle European Select, for example, LVMH because it has such strong pricing power. If we do hit a recession, it won’t be the shoppers of Louis Vuitton handbags or other top luxury items that will suffer the most, it will be people on the lower income end. I think that’s very bad socially. But it does mean that the business models of luxury groups are well supported.
How have the corona restrictions in Asia, especially in China, affected luxury customers? The region is considered the most important market for luxury goods.
There are two conflicting factors. If you’re locked up and still making good money, you might as well spend it buying a nice product online. But the other factor in this situation is what’s the point of buying a nice watch in lockdown if you can’t show it to anyone. And I think luxury products vary a lot on that spectrum. The companies we buy are generally quite well hedged against this development.
In what way?
Cosmetics usually have a very long shelf life. If you have a bottle of perfume on a shelf in Hong Kong and Hong Kong is on lockdown, you can put it in a container and ship it to New York and sell it there just as well. It doesn’t work that way with cars because firstly it’s expensive to send the car to America and secondly it’s not suitable for the American market because cars in America are different from Hong Kong. So it’s a very, very different dynamic in different sectors.
Threadneedle (Lux) – European Select Class 1E ( Shares) fund, ISIN: LU1868839181
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Image credits: Columbia Threadneedle
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